What is Deferred Interest?

What is Deferred Interest?

“Get approved today and pay no interest for 12 months!” You probably see advertisements that make similar claims on television frequently. This is an example of a deferred interest loan.

Deferring interest on credit purchases is a popular way for retailers to attract customers. From credit cards to automobile loans, many lenders offer these types of loan options.

If you sign a credit card offer with a deferred interest plan, it means that you will not be charged interest for a specified time period. The average amount of time for most deferred interest programs is 12 months.

With a deferred payment plan, the accrued interest will be added to your principal balance at the end of the deferment period. At that time, you will be responsible for paying the interest and the principal.

What You Should Know About Deferred Interest Plans

Getting a loan without having to pay interest sounds like a good deal. However, there are conditions that you must adhere to if you want to enjoy the benefits of these plans. Here are some things you should know.

  1. The full balance of the loan or line of credit must be repaid before the end of the deferment period to enjoy the interest-free benefits.
  2. Late payments can automatically cancel your deferred interest plan. In most instances, you aren’t allowed to miss more than two payments or be over 60 days late.
  3. To repay the entire amount of a deferred-interest loan within the allotted time, you must make more than the minimum payment.
  4. You should know the exact date the deferment period ends. This will help you make a plan to repay the entire balance before the end of the plan.
  5. Make your final payment a few weeks before the deferment period ends. By taking this action, you will allot enough time for your payment to be processed.
  6. The terms of deferment offers can be confusing. Before you agree to one of these offers, you need to fully understand the terms.

How to Assess a Deferred Interest Offer

All deferment plans are not created equally. For that reason, you should be cautious when you sign up for any offer. Some offers can be a financial trap.

1. Retail credit cards typically have the worst interest rates in the industry. The average APR for retail credit accounts is 23%. Since retailers do not base interest rates on credit scores, every customer receives the same credit offer. This can be expensive if you aren’t able to repay the entire balance of your deferment plan.

2. Penalties for not repaying the balance can be significant. Depending on your purchase, you could expect to pay hundreds (or thousands) of dollars in interest.

3. If you make purchases that are added to your promotional balance, any payments you make will go toward the payments with the highest APR first. At the end of the promotional period, you may be surprised to learn that you still owe money on the principal.

Deferred interest programs can be good offer. To benefit from them, you must use them wisely.